EXTENSION OF PAYROLL TAX CUT CONTAINS A HIKE IN MORTGAGE FEES

It’s official! Congress has passed a two-month extension of the payroll tax cut that was initially implemented to put more money in the hands of consumers each week. Unfortunately, the extension is funded by a hike in the fees that Fannie and Freddie charge banks for the government guarantee that’s now on all of the mortgage-backed securities (MBS) they issue. Two brief comments before I leave for the holiday:

This is the first time in history that a fee has been placed on mortgage originations to fund something completely unrelated to the mortgage market. As such, this is effectively a new TAX and not a fee, as they call it in the bill.

Does Congress really think that banks are going to be the ones paying this fee? As Paul Muolo over at Origination News so eloquently put it, “If they do, maybe Santa will come sliding down their chimneys in two days.” All this does is raise the cost of purchasing or refinancing a home, and it comes just at the time that the news from the housing market isn’t all doom and gloom. Merry Christmas, homeowners! You just got stuck paying for someone else’s Christmas gifts…

That’s a good question, Ron. In this case, the idea had strong bi-partisan support. The original sponsor of the legislation in the Senate was Robert Casey (D-PA), but the bill did not pass in its original form. The language that was put in the final Senate version was taken from Casey’s bill, but was altered slightly by the leadership (likely Senator Reid’s office). On the House side, the idea first found its way into legislation from Rep. Dave Camp (R-MI), but the final compromise to get the languagage to agree was likely hashed out in Speaker Boehner’s office. At the end of the day, the legislation passed the Senate and the House with support from members of both parties over the objection of the Mortgage Bankers’ Association, the National Association of Realtors and the National Association of Homebuilders.

You can trace the concept of hiking mortgage fees to pay for Government expenses back to the bi-partisan Debt Relief Committee that failed spectacularly in accomplishing anything back in November. One of the key points of agreement in that committee was that Fannie and Freddie guarantee fees could be increased to pay down the debt. Most industry groups strongly oppose Fannie/Freddie fees being used for anything OTHER than paying for expenses and risk related to those entities. Representative Camp seems to believe that increasing the fees will incent the private sector to step into the mortgage market again by making GSE loans more expensive. I’m of the opinion that he’s incorrect – that private enterprises will have no interest in large-scale MBS securitizations unless and until we’ve found a bottom in home values (which won’t happen until we can work through the foreclosure backlog) and the industry knows what all of the implementing regulations for Dodd-Frank will look like. For example, rumor has it that the risk-retention requirement is dead, at least in the form it took with the proposed QRM rule that was issued earlier this year, but we have no official word on that. If it’s dead, what’s next? The statute is pretty clear on risk-retention, even if it did give the Federal banking agencies a lot of latitude to implement it. Right now, the only certainty is uncertainty, and that’s not an environment that business likes.

Either way, using Fannie and Freddie fees to pay for non-housing related expenses is terrible policy (again, in my opinion) because Congress will be tempted to go back to the trough each time they need to pay for some new policy or other. In other words, it addicts Congress to the GSEs at the same time that the stated goal is to UNWIND those agencies. Ironically enough, even the FHFA was opposed to this idea for that reason. Once Congress finds a new revenue source, it is loathe to let go of it, so the lingering question will continue to be what happens to the GSEs in the future? That remains to be seen.

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